Risk Measurement Guidelines - EVCA

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Figure 2: Backward annualisation (VaR based on volatilities of cash flows)Projected rangeof scenariosOutcome of specificscenariotimet0 t1 tmax18 I EVCA Risk Measurement Guidelines 2013
The procedure for a cash flow model-based VaR calculation is as follows:Exhibit 4: Cash Flow Model-Based VaR CalculationFOR i =1 TO simulation_sample_size DOEND;FOR j=1 TO number_of_funds_in_portfolio DOEND;Randomly generate new set of input parameters for fund j (e.g. lifetime, growth rates that are varied within historically observed / stressed ranges.Changes of parameters need to consider dependencies for funds (i.e. cannot be assumed as being independent));Generate cash flow projection for fund j over time interval [t0,tj] (with tj being the time of the last cash flow for fund j);Aggregate all number_of_funds_in_portfolio cash flow projections to sample i for cash flow of portfolio of funds over time interval [t0,tmax] (with tmax being the timeof latest cash flow for the entire portfolio of funds);Apply suitable discount rate to determine the present value vi of sample i for portfolio of funds;*** We have now the present value for the portfolio of funds for cash flows over time interval [t0,tmax], i.e. the portfolio’s entire lifetime. However, we need to determinethe present value of the portfolio at time t1≤tmax]***Deduct present value for cash flow of portfolio of funds over time interval [t0,t1];Save present value for the portfolio of funds at time t1 for sample i ;Compile distribution function for all s samples;Based on distribution function determine VaR for probability level α;EVCA Risk Measurement Guidelines 2013 I 19
Page 4 and 5: IntroductionInvestors in private eq
Page 6 and 7: 1Key Objectives ofPrivate Equity Ri
Page 8 and 9: Exhibit 1Prior to the financial cri
Page 10 and 11: For this purpose, a risk model for
Page 12 and 13: 3Overview ofMain Risks to beConside
Page 14 and 15: Interest rates and refinancing term
Page 16 and 17: The volatility is estimated by meas
Page 20 and 21: Exhibit 4How can we calculate a por
Page 22 and 23: Exhibit 4(2) For each scenario i an
Page 24 and 25: In practice, the bottom-up approach
Page 26 and 27: In a buoyant economy, proceeds from
Page 28 and 29: The use of correlation as a measure
Page 30 and 31: II. Top-down approachThis approach
Page 32 and 33: 9ApplicationGuidanceThis section pr
Page 34 and 35: Discount rates can also be used to
Page 36 and 37: 10GlossaryEntries in the glossary m
Page 38 and 39: Net asset value (NAV)The NAV of a f
Page 40: The ‘Private Equity Fund Risk Mea

Risk Measurement Guidelines - EVCA

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